Showing posts with label DRT. Show all posts
Showing posts with label DRT. Show all posts

Friday, December 29, 2017

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC) A view

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC)


The Financial sector is facing a crisis of mounting Non-performing assets and the initiatives taken by the Government to speed up the process of recovery through DRTs and SARFAESI Act has not effectively addressed the Problem. Gross NPA ratio was 2.7 per cent in 2011, 3.4 per cent in 2012 and 4 per cent in 2013. In 2014 it rose to 4.3 per cent, and further to 5.9 per cent in 2015 and peaked to 9.2 per cent in 2016. With 470 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, most experts are keenly watching the outcome of the first set of 12 big corporate defaulters that lenders have sought to resolve under the RBI’s directive in June this year. RBI will release the next 12 default companies list with a deadline to resolve the same before Dec 2018.
Hence, the Government proposed to amend the Insolvency and Bankruptcy code to give more teeth to the Bankers.

Highlights of the Ordinance

Ø  Prohibit the wilful defaulters, disqualified directors, promoters or management of the defaulting company, and any person who has committed these activities abroad from submitting a resolution plan for restructuring the debt.
Ø  Bars an insolvency professional from selling the property of a defaulter to any such person during liquidation.

Key Issues and Analysis
  
ü  Resolution applicant:  The Ordinance amends to define a resolution applicant as a person who submits a resolution plan after receiving an invite by the insolvency professional to do so.

ü  Eligibility for resolution applicants:  It amends a resolution professional/ Insolvency and Bankruptcy Board will only invite those resolution applicants to submit a plan, subject to certain condition.

ü  Ineligibility to be a resolution applicant:  The amendment prohibits the following persons from submitting resolution plan .
(i)              he is an undercharged insolvent (individual unable to repay his debt),
(ii)                    he is a wilful defaulter identified by the Reserve Bank of India,
(iii)            his account has been identified as a non-performing asset for more than a year,
(iv)                he has been convicted of an offence punishable with two ormore years of imprisonment,
(v)                he has been disqualified as a director under the Companies Act, 2013,
(vi)               he has been prohibited from trading in securities,
(vii)               he has indulged in undervalued or fraudulent transactions,
(viii)             he has executed an enforceable guarantee in favour of a person who is a creditor to a defaulter undergoing a resolution process,
(ix)               he is connected to any such person mentioned above (including promoters or people in control of the defaulting firm during the implementation of the resolution plan), or
(x)                he has indulged in any of these activities outside India.


ü  Approving resolution plan: The Ordinance amends to state that the committee will approve this resolution plan by 75% majority subject to any other conditions specified by the Insolvency and Bankruptcy Board.

ü  The Ordinance prohibits the committee of creditors from approving a resolution plan submitted before the promulgation of this Ordinance, where the plan has been submitted by a person ineligible to be a resolution applicant.

ü   Liquidation: Ordinance prohibits the insolvency professional from selling the property to any person who is ineligible to be a resolution applicant.

ü  Penalties: Provision to specify that any person contravening provisions of the Code for which no penalty has been specified will be punishable with a fine ranging between one lakh rupees to two crore rupees.

ü  Loan defaulters can not participate in bidding under the insolvency proceedings after paying due interest and making their bad loan accounts operational,



What is in it for banks?

At present the bank has to get a buyer and accept a huge haircut to get ride of the NPA otherwise they will be left with nothing if the company goes into liquidation.  Insolvency & Bankruptcy Code is likely to play an important role in addressing the non-performing assets (NPA) of the banking sector. The NPA affects the CRAR of the banks thereby affecting the economic growth due to poor credit off take.  
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1.   In terms of Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 the Code takes  precedence over the DRT Act and SARFAESI Act that during the insolvency resolution process

2.   “All pending proceedings are stayed for a period of 180 days from the date of admission of the application to initiate such proceeding in terms of Section 12 of the Code”

3.    The Code devises two separate processes for corporate insolvency matters and individual/ un-incorporated bankruptcy matter. Part II of the Code deals with corporate insolvency mechanism pertaining to companies incorporated under the Companies Act, 1956 and 2013 and limited liability partnership incorporated under the Limited Liability Partnership Act, 2008; matters in this regard will be dealt by the National Company Law Tribunal. Part III deals with the bankruptcy process for individuals and partnership firms (unincorporated entities) and is maintainable before the Debt Recovery Tribunal. Both Parts II and III provide a detailed procedure for declaring a company, LLP, individual, or unincorporated entity.

4.   Section 14 of the Code the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:, on the insolvency commencement date        

(a)        The institution/ continuation of any pending including execution of judgment or decree..
(b)         Transferring, encumbering, alienating, or disposing of corporate debtors assets.
(c)          Any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property including SARFAESI act
(d)         The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
(e)         The provisions shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
(f)           The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process except liquidation process.
(g)        that all pending proceedings are stayed for a period of 180 days from the date of admission of the application to initiate such proceeding.
(h)         The second stage that the security held by a creditor may be affected with respect to a corporate debtor is under the liquidation order. The Secured creditor will have two option

(a)        A secured creditor can choose to relinquish his/her security interest and be part of the liquidation process with preference of distribution; or
(b)        A secured creditor can choose to stay outside the liquidation process and enforce his/her security interest.

Concerns ahead:


Though the legislature has made extensive efforts to bring harmony between these laws, it is yet to stand the test of implementation. Some immediate concerns are as follows:
1. Time-bound insolvency resolution requires the establishment of several new entities.

2. Interpretation and harmonization of various laws, leading to delay in insolvency proceedings.

3. Harmonization for the interplay of the different laws will have to be done.

4. Applicability of the CDR and JLF proceedings on the Code will have to be addressed separately.

Though the provisions are yet to be examined by the courts of law, Section 14(1)(c) of the Code clearly provides that during the insolvency resolution process as defined in the Code, the Code takes precedence over the DRT Act and SARFAESI Act.


Conclusion


We trust and hope that the NCLT and Debt Recovery Tribunal under the Code will function effectively and follow the timelines.  However, it is our experience that the objectives were not achieved due to the delayed legal process, ignorance of the banks, in case DRT act and SARFAESI act and the same should not happens in IBC also.

BASED on the Governement notifications and selected readings in Internet

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